The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
/us*-^ f 'c-t-^.i/y <2* ISLJtelease on Delivery approximately 12:30 p.m., ^stern Daylight Time, be Ptember 21, 1956,) ) M A T THE MARKETING MAN SHOULD WATCH CONCERNING CREDIT Address of C. Canby Balderston, Vice Chairman, Board of Governors of the Federal Reserve System, Before the Marketing Conference, National Industrial Conference Board, Inc., | New York City, on Friday, September 21, 1956. L f WHAT THE I-IARKETING MAN SHOULD WATCH CONCERNING CREDIT It is quite customary for businessmen to attempt to discern what future holds both with respect to physical changes in business activity as to price trends. They also wonder hew their expansion and sales plans be affected by the national credit policy. Instead of giving you more r P °phesies, since you are constantly bombarded with predictions, I will Averse the process and suggest what factors should be watched that are Ukely to influence central bank policy. The observations will fall into three categories: (1) Those that have to do with production, distribution and prices; (2) Those that have to do with the quantitative aspects of money and credit; (3) Those that have to do with the quality of credit and of business decisions. To keep abreast of the nonmonetary changes in the economy, the Us inessman should watch at least six measures. These are: 1. The Federal Reserve Board Index of Industrial Production. 2. Sales data for both manufacturing and retail establishments. 3. Inventories at each of the three levels—manufacturing, wholesale, and retail. Price and wage indices. 5. Employment and unemployment. 6 . Gross national product and personal income. An informative means of visualizing income data is to express them on a per capita, or per family basis. The Office of Business Economics of the Department of Commerce estimates that last year the average (mean) Personal income per family was $5,520, of which income taxes took $540, having disposable income of ^4,980. to rise this year. Incomes and spending have continued Currently, total personal income is 7 per cent above the average for last year and family income is up by almost this percentage. ^Iso up significantly from last year are total consumer spending for goods an d services and also the dollar amount and rate of personal saving. Americans live in about 50 million housing units, and use over 50 million passenger automobiles, 130 million radios, and nearly 40 million R e v i s i o n sets. Whether these are necessities or mere gadgets, and whether of them contribute to a good life need not be debated here; at least We have the physical basis for good living. Underlying the growth in fa toily i n c o m e a n d i n stocks of houses and consumer durable goods has been ^stained rise in productivity. The increase in output per man-hour been the joint result of many influences, including technological Chan g e , growth of fixed capital, and the skills and attitudes of manageand workers. Since the turn of the century, the American manufactur- e s Worker has turned out over twice the goods in one-third less time, and his 0( ^ iuctiveness may be described as rising about two and one-half per cent year. The rise in output per worker and the wide distribution of incomes anci assets have enabled a large and growing proportion of our families to standards of living that—not so many years ago—only the then wealthy attain. Both the top and the large middle income groups use -3SlJ bstantially the same foods, television sets, household appliances, and a utornobiles. Manual workers enjoy comforts once reserved to kings. the In less material sphere, distinctions arising out of disparities in income also being blurred. to a U. Higher education has become increasingly accessible Upper and lower groups read the same newspapers, see the same Iu °vies, and listen to the same music. The combination of this increased national pile of goods and 5er vices, together with the redistribution of incomes by taxation, has leci na the Twentieth Century Fund, to observe that "of all the great industrial U o n s , the one that clings most tenaciously to private capitalism has closest to the Socialist goal of providing abundance for all in a a °^ ssless society." Turning now to prices and wages, both of which reflect the interpla ab y of the forces of demand and supply, price and wage information is Undantly available for nearly all industries and localities. CUs It is tomary to watch sensitive commodities and also more general measures of R e s a l e prices in order to judge the strength of demands in the economy also to appraise the implications for future movements of retail prices. Uc ^ h more difficult to come by in many industries, however, a r e data as to St °cks on hand which, together with output, sales and other data, are ess ential in evaluating the near-term future. ^ f e ^ a n d Credit All the measures mentioned so far are those with which the businesshas intimate acquaintanceship. But credit and the money supply, though fundamental to his activities and well being, are perhaps less ta ngible and familiar. On the quantitative side, changes in the money supply a re funda- mental. Anyone who wishes to determine whether the money supply is being increased or decreased, and at what rate, may watch changes in seasonally ^justed money supply from the Federal Reserve Bulletin. Other data are Provided in the Bulletin for those who wish to follow both nonfinancial financial developments. Thus, one may observe not only changes in ^ tr total use of credit but also changes in its composition. He may keep ack of changes in mortgage debt—both nonresidential and residential— consumer debt, including instalment debt, and bank loans to industrial anc * commercial establishments that reflect the needs for inventories and Wor ^ing capital. Of special relevance is the amount of borrowing done by member at the Federal Reserve Banks, which shows up in the discount and d a n c e s figure week by week. Highly significant in the view of many S e r v e r s is the volume of so-called free reserves, which represents the H e b r a i c difference between the excess reserves that commercial banks must and the aggregate amount borrowed by them from the Federal Reserve Bank s. During periods of the business cycle when demands for credit are d a t i v e l y low and the Federal Reserve is making an effort to stimulate bus iness recovery by adding to bank reserves and easing credit, this figure ^ ^ be a positive one. During times of boom when the Federal Reserve ^stem feels it necessary to restrain speculative exuberance and excessive demand, the figure will be a negative one, i.e., commercial banks will, 9,3 a group and on a net basis, be indebted to the Federal Reserve Banks, -5this last case the figure nay appropriately be called net borrowed ^serves, As to the price of money, the businessman is, of course, most directly concerned with the interest rate he himself must pay on money he borrows. In addition he may well watch market quotations on both long-term a nd short-term securities, since from these he may be able to discern ^ends toward tightening or easing in the general availability of funds. 0f Particular significance in this connection are the discount rates cha rged by the Federal Reserve to their member banks. A change in the dis- count rate usually means that the Federal Reserve believes interest rates, ^hich are the price one pays to rent somebody else's money, have already ha ° nged sufficiently to justify a change in the price which commercial banks s hould pay when they borrow from their bank of last resort. A change in discount rate may also signal that the Federal Reserve is attempting to LSimulate business or to keep it within sustainable bounds. The central speaks through actions. is It guards against too many pronouncements aid economical in its use of words lest they be misunderstood and misinter- preted. Discount rate changes represent one of the few monetary indicators that reach the front pages. ^ i j t ^ o f Credit and of Business Decisions Turning now to tte qualitative side of credit, businessmen may well p0 *Mer f r o m time to time some indicators that reflect the carefulness and Science of both lenders and borrowers. An essential balance that is freqUer *tl y lost sight of is that between equity and debt, lihen equity becomes th' q:iri ner, as happens when down payments are lowered and repayment periods are f e t c h e d . the quality of that credit is weakened. The most fundamental of quality is the ability of the borrower to repay, In the case of a -6loan to a business, this test is met by a consideration of the use to which the credit is put and the additional product and profit that will result. the purpose of the loan is productive and promises to be profitable, then the loan may be said to be credit-worthy. In the case of a consumer, n ° the other hand, the quality test must be met in a different way. Many to consumers, indeed, are for purposes that do not result in the ac quisition of a marketable asset. Thus consumers may borrow merely to pro- vi ne ^e pleasure, such as for foreign travel. For loans of this type, quality cessarily depends on the character of the borrower, on his income, and n ° the nature of his financial responsibilities and resources. Still another gauge of quality consists of the lending terms. You ^ U note that the stretching of terms is related to the thinning of equity, example, when the terms of automobile paper dropped last year from l/3 and 30 months to pay to l/U down and 36 months to pay, the equity of the Cen car buyer at the end of one year dropped from 30 per cent to 10 per t of the depreciated value, I have attempt ed to indicate how one may keep aware of the economic traffic that flows around him. A related question is: 0 f What are the "rules the road" that enable this traffic to move fast but safely? Perhaps the most fundamental of them is the preservation of balance Proportion. The economy needs a nice balance between piKxkict-ion and between caution and daring, between liquidity and the exiansion that l o w i n g makes possible. What is needed is neither the excessive conSer vatism that inhibits adventure and growth nor actions based upon mere 'Peculation. In the short run, the use of resources for increasing productive -7capacity and for increasing the consumption of goods and services must be kept in balance. In the long run, the important consideration is to foster the highest sustainable level of economic growth so that productive capacity may keep up with the needs of an expanding population for both more goods and more jobs. In short, the goal of economic growth without inflation calls 1 for business decisions of high quality. Such decisions are marked by prudence, discretion and hard-headed common sense, unaffected by speculative f ever and thoughtless competitive rivalry. The business and governmental decisions of this year will color the business situation next year and the year beyond. As Mr. Eugene Meyer, who has in the past headed the Federal Reserve Board and the Reconstruction Finance Corporation, and now the Washington Post-Times Herald, observed over a third of a century ago, "Over-expansion, inevitably and always, is characterized by over-confidence an c <l its impelling power is found in cupidity . . . If one could plot the ^rves of optimism and pessimism as exactly as one can plot the curves of Prices and the volume of production and consumption, one would find that fall considerably behind the material conditions. Only the few anticipate events; the many stop, look and listen after the event is past,"
@FedFRASER